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It's time for another cigarette manufacturer to tell a sad story. Philip Morris (Pakistan) Limited (PSX: PMPK), which is only second to the tobacco giant Pakistan Tobacco Company Limited (PSX: PAKT) in the formal tobacco industry locally, has seen its financials beaten black and blue for the quarter ended September 30, 2019. (For a review of PAKT's quarterly performance, read: "Topline woes for PAKT," published October 18, 2019).

It isn't unusual for PMPK to suffer topline decline when rest of the industry is also struggling to grow the sales lately. But the magnitude of topline slump at PMPK is much higher in 3QCY19, compared to the market leader, PAKT.

Philip Morris (Pakistan) Limited: latest financials
(Rs mn) 3QCY19 3QCY18 Chg
Net turnover          1,520          3,503 -57%
Cost of sales          1,454          2,132 -32%
Gross Profit                66          1,371 -95%
Distribution & marketing expenses              752              759 -1%
Administrative expenses              419              334 26%
Other expenses              226              139 63%
Other income              121                45 173%
Operating profit         (1,211)              184 -756%
Finance cost                  8                  7 22%
Profit before tax         (1,219)              178 -785%
Taxation            (437)                21 -2228%
Profit after tax            (782)              157 -597%
EPS - Rs -12.7 2.55 -598%
Source: PSX notice

The PMPK's net turnover has more than halved over previous year in the quarter. It is a result of not only FED-led increase in prices of cigarette packs (which hurts volumes), but also the higher FED collected per rupee of revenue (which reduces how much of the gross sales the firm can count as net turnover). It would have helped if PMPK also started publishing gross turnover in its quarterly financial announcements.

But the topline fall isn't the whole story. The firm went on to score a large operating loss, mainly due to the fact that its costs and expenses did not fall in line with the sagging sales. As a result, 'cost of sales' was 96 percent of the net turnover in 3QCY19, significantly up from 61 percent in the same period last year. Despite lower production, cost of sales is affected by higher input prices, due in part to rising cost of utilities and the impact of rupee devaluation this year.

The rest of the topline was overwhelmed by 'distribution and marketing expenses' and 'administrative expenses'. Together, the two accounts equated to 77 percent of net turnover in the quarter, way more than 31 percent seen in 3QCY18. In these lean times, PMPK must curtail these expenditures in line with the business outlook. Doing so won't push the firm back into profits, but it may at least curtail the losses.

With an operating loss equal to 80 percent of the net turnover, it appears that PMPK is much more sensitive to the industry's declining fortunes than what PAKT has managed in the quarter with an operating margin of 14 percent. Unless the topline turns around drastically, of which there is decreasing likelihood, the PMI subsidiary is en route to posting its worst loss-making year this decade.